Pennsylvania lawmakers deserve some credit for putting their state on the leading edge of this trend toward sports betting.
The legislature passed an enabling law last year, even before the US Supreme Court considered overturning the federal ban known as PASPA. That prohibition is no longer on the books, and Pennsylvania sports betting is legal pending final regulations.
Casino operators aren’t exactly lining up at the license office in anticipation, though. The specifics of the PA law leave a lot to be desired, clipping the industry’s wings before it even tries to fly.
Here’s how Brett Collson put it on the most recent episode of TheLines podcast:
“Pennsylvania is kind of a wild card this year. The regulations for sports betting currently in place are… concerning.”
What’s wrong with them? We’ll explain.
PA gets aggro with gambling taxes
As the saying goes, two things in life are certain: Death and high gambling taxes in PA.
The state’s expansion into these new formats will be taxed at a rate that raises serious questions about sustainability. As the law is written, sportsbooks will have to pay 36 percent of their revenue back to state and local coffers. That is a ridiculous number.
Compare that to Nevada, which has been refining its industry for almost 70 years. Nevada sportsbooks return 6.75 percent of their revenue to the state, and things work just great. Operators make a little profit, the state collects tens of millions of dollars, and bettors get to do what they do in a regulated environment.
PA operators will pay more than five times the tax rate in Nevada, a serious disincentive for some operators.
Spokesman Eric Schippers says Hollywood Casino isn’t even sure it wants sports betting under those terms. “We haven’t made a final determination on whether to pursue what is the highest rate on the planet for sports betting,” he told Penn Live.
A couple states (like Delaware and Rhode Island) will offer sports betting through more lopsided revenue-sharing agreements with their lotteries. Those are exceptions to the rule, though. Most states are proposing something between 7-15 percent.
It’s also worth mentioning that the oppressive taxation won’t be limited to sports betting. PA will tax online slot revenue at 54 percent, more than twice the rate at which operators say they feel comfortable. Slot play accounts for around three-quarters of total online gambling revenue in existing markets.
By way of another comparison, New Jersey taxes online slot revenue at 17.5 percent.
A high bar to entry for casinos too
The recurring costs are unfriendly, but some operators might not even be able to squeeze in the door. Obtaining a PA sports betting license requires operators to overcome the tallest hurdle in any US market, existing or proposed.
Like tax rates, there is no state standard for licensing fees. As an example, Indiana recently considered a bill with a proposed fee of just $5,000. There are some big ones, too, including the $5 million suggested in one Illinois bill. In broad terms, a couple hundred thousand dollars seems to be within the range across most states.
PA sports betting licenses will cost $10 million apiece, though, larger than any other proposal. The tax rate makes the market unappealing from the start, and the up-front fee will be a dealbreaker for some properties.
As the smallest PA casino, Lady Luck Nemacolin is a good example. The property generated around $20 million in total revenue last year, so there’s almost no way it would front the money for a license. Its only real path to sports betting would involve a partnership with an existing operator.
It’s not just the little guys, though. Hollywood Casino tallied more than $100 million in revenue last year, and it seems to have a good foothold on its market. Still, giving away $10 million is not a high priority. Schippers said that if Hollywood does offer sports betting, it would try to do so on the cheap. “The state has strangled the goose on this one,” he said.
There’s also some disparity between the licensure for sports betting and other forms of online gambling. Casinos will pay $4 million for a license in each of these game types:
- Slot machines
- Table games
While each of these separately cost $4 million, for $10 million, a property can purchase all three. So, casinos can spend the same amount of money to offer sports betting as they would to offer every form of iGaming.
So what? The state needs money
Yes, it certainly does. The fact that Pennsylvania has been operating under a budget shortfall is the only reason we even have a sports betting law to pick on.
This is the issue, though. Rather than viewing expanded gambling as an amenity for casinos, the state took it as an opportunity to plug its own leaks. Tax revenue is arguably the worst reason to allow expanded gambling, and that’s especially true for sports betting.
As any bookmaker (or bettor) will tell you, sports gambling has some of the tightest margins in the industry. Although bettors plunked down almost $5 billion last year in Nevada, sportsbooks earned less than $250 million, holding around five percent of the total “handle.”
In simple terms, operators earn about a nickel on every dollar bet. And Pennsylvania will take back almost two cents of that in taxes. That take will be counterproductive to what should have been the primary reason for legalization.
Sports betting is unique in that operators aren’t competing against each other as much as they are competing against offshore sites. There’s something like $150 billion wagered in the US each year, and almost all of it is done through black/gray channels. In order to provide a tempting alternative, the regulated industry must provide similar convenience and competitive lines.
Convenience won’t be a problem as long as there is mobile wagering, but competitive lines might be. If bookmakers want to be profitable in PA, they’ll almost certainly have to pad their lines. And if PA lines aren’t competitive, those in the know will just keep betting with “their guy.”
By writing their greed and shortsightedness into law, PA lawmakers are actually doing the unregulated industry a bit of a favor.